Magazine

Commentary: The New Power Play in Health Care

January 27, 2002

Last fall, some 200,000 Northern Californians had reason to reach for the Prozac. As members of a health insurance plan run by Woodland Hills-based Health Net Inc. (HNT), they feared being shut out of many local hospitals if they got sick or hurt over the next year. That's because Health Net was balking at the 25% annual payment hikes demanded by Sutter Health, a mammoth health-care provider with 26 hospitals and 5,000 doctors serving San Francisco and 100 other cities across half the Golden State. And Sutter was playing rough: It yanked its own 30,000 employees out of Health Net and pounded the insurer in newspaper ads, suggesting that perhaps patients should switch health plans.

Sutter's tactics scared the daylights out of Health Net members, prompting some 20,000 to jump to other insurers, says Health Net Senior Vice-President David Olson. In the end, his company, which insures 5.5 million in 13 states, agreed on a two-year contract with Sutter. Health Net then jacked up its premiums by about 15%. Sutter spokesman Bill Gleeson defends the ads as a necessary early warning for patients when talks are going poorly.

A little cutthroat for folks in the healing profession? No doubt. Yet such brawls are increasingly common as the growth of regional monopolies like Sutter dramatically boosts the pricing power of health-care providers once again. Throughout much of the 1990s, managed care gave insurers like Health Net the clout to dictate ever-stingier terms to hospitals, doctors, and other health-care providers. The controls cooled years of feverish medical inflation and helped hold health-care cost hikes in the single digits. Now costs are soaring upward again, thanks to the waves of mergers and closings that have consolidated hospitals into ever-larger chains like Sutter, with much more pricing power (charts). Already, family premiums are jumping up, and states are struggling to pay for crushing Medicaid expenses. "We have instituted survival of the fattest," warns Alan Sager, a professor of health services at Boston University.

The public backlash against the gatekeepers has bolstered providers' growing strength. As patients chafe at restrictions on which doctors they can see, they have stampeded out of HMOs. Just 23% of workers are covered by HMOs today, vs. 31% in 1996, according to the Kaiser Family Foundation. By contrast, 70% now use less restrictive preferred-provider organizations or point-of-service plans, up from 42%. The result: Americans have gained some patients' rights, but at the expense of giving providers more leeway to ram through price increases.

No relief is in sight. With managed care pretty much spent as a check on rising costs, the nation's health-care tab may hit 16% of gross domestic product by 2010, vs. 13.4% now, according to the Health & Human Services Dept. "Americans should get used to the fact that health-care costs are going to take an ever-larger share of GDP," says Princeton University health-care economist Uwe E. Reinhardt.

There are a few ways to cool off the price fever. For one, providers and insurers should make their prices public, so companies can prod employees to consider cost when they seek medical care. Washington and the states also should use the antitrust stick to dampen some of the new provider clout. On Jan. 4, the Massachusetts Attorney General opened an antitrust probe of statewide physicians and hospitals.

To see why this is a good idea, just look at providers' growing power. The number of hospitals has shrunk by about 9% since 1990, to 4,915, even as the U.S. population has expanded by 13%. Massachusetts, for example, has fewer than 70 hospitals, down from about 90 a decade ago. Some 40 hospitals have closed in Northern California in recent years. Those remaining have consolidated into ever-larger chains: Just four companies manage 70% of beds in Cleveland, vs. 41% in 1994, for instance. In 10 of 12 representative markets across the U.S., four companies control most patient admissions, says the Washington-based Center for Studying Health System Change (HSC). That's the level defined as "concentrated" by the Justice Dept. for the purposes of antitrust regulation.

Hospital chains are flexing their new muscle. Spending on hospitals jumped by 5.1% in 2000, vs. an average of 3.5% from 1994 to 1999, according to HHS figures released on Jan. 7. Hospitals accounted for 43% of the increase in employer health-care spending, almost double their 1999 share, HSC concluded. They even outstripped prescription-drug spending, which accounted for 29% of employers' higher medical costs.

Indeed, bare-knuckle battles have broken out across the country. One involved Partners HealthCare System Inc., a Boston hospital group that controls a fifth of all hospital beds in eastern Massachusetts. In 2000, it stormed away from the bargaining table with Tufts Health Plan, which serves 900,000 people, after the insurer refused 30% increases over three years. Partners posted notices at Mass General saying that Tufts cards were no longer acceptable. Finally, Tufts agreed to Partners' terms, bringing 9% to 12% premium hikes for Tufts customers. Partners defends its price push, arguing that it's necessary to provide good medical care, especially at teaching hospitals. "We're not trying to be profligate, but we do have to have margins to invest in research and education," says Partners CEO Samuel O. Thier.

Like hospitals, doctors are beginning to see strength in numbers. In recent years, many have formed groups to pool their negotiating power. In Seattle, groups of specialists refused to renew contracts in 2000 with 1 million-member Regence BlueShield, the biggest insurer in Washington State, in a dispute over fees. As a result, Regence was shut out of big swaths of Seattle for months.

In one high-profile fight, a 75-doctor group refused to handle Regence patients for six months while the parties dickered. The docs' grievance: Government reimbursement schemes, used as benchmarks by many private health plans, had pushed down their payments. The group, Proliance Surgeons, won the battle, lifting Regence's doctor expenses by up to 12% in 2002.

Providers like Sutter and Partners explain the price hikes as an effort to restore the quality of care. While some agree that managed care wrung inefficiencies out of the system, they argue that the controls cut flesh along with the fat. Still, the exceptional power they have garnered seems all too easy to abuse.

What's to be done? For one thing, antitrust authorities should look at markets where providers wield disproportionate influence. Does it really promote competition for 11 Boston area hospitals to form a united front? Another step would be to make costs public, something hospitals, doctors, and insurers generally refuse to do. For a truly competitive system, consumers must weigh prices when they choose what health care to buy. Finally, we all may have to learn how to shop for health care, paying as much mind to doctor bills as we do to, say, car prices. PacifiCare Health Systems (PHSY) has begun offering a lower-cost plan in which patients shoulder copayments of up to $400 a day if they go to higher-cost hospitals but pay nothing extra for lower-priced ones.

Such efforts may prove to be only Band-Aids. Systems that exclude people based on price also raise the specter of unequal care. But as things now stand, the U.S. tolerates a system in which everyone pays exorbitantly and there are few checks on prices. Unless the private sector can come up with workable solutions, the clamor for a heavier government hand is sure to rise anew. By Joseph Weber